Greening the Bretton Woods Institutions by Axel Weber

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Greening the Bretton Woods Institutions by Axel Weber

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Bibliographic details

• Authors: AXEL WEBER
• Published: June 3, 2024

Overview

• The Bretton Woods institutions—the IMF and the World Bank—have contributed to global stability, unprecedented economic growth, increasing prosperity, and broad-based poverty reduction.
• Climate change constitutes a new global challenge requiring a timely, global response; creating new multilateral institutions would take too long, so equipping existing institutions is preferred.
• Any additional climate mandate for the Bretton Woods institutions must not come at the expense of their core mandates: economic and financial stability for the IMF and sustainable development and poverty reduction for the World Bank.
• Recommendations draw on the Bretton Woods Committee’s Multilateral Reform Working Group publication “Strengthening the World Bank and the IMF to Meet 21st Century Global Challenges,” cochaired by the author.

Financing

• Climate action at the IMF and the World Bank needs substantial additional financial resources, not simply redirection of existing resources or depletion of financial buffers.
• The IMF’s Resilience and Sustainability Facility (RSF) illustrates the financing challenge:
  • Repurposing billions of dollars of “unused” special drawing rights (SDRs) for climate action creates an undesirable trade-off between climate action and the IMF’s core mission.
  • Dedicating central bank reserves or SDRs to climate action is problematic.
• Proposed financing approach:
  • Fund the RSF with new financial commitments from a coalition of countries willing to sponsor such climate action (ideally all IMF member countries would participate along their respective quota allocations).
  • Treat climate-related IMF activities in all member countries as financial obligations of the general government, which would formally increase the country’s government debt.
  • Clarify that IMF climate-related action is not a central bank responsibility and should be accounted for as a new IMF task financed by general government expenditures.

Governance

• A clear division of labor between the IMF and the World Bank for their additional climate mandates is essential.
• Funding obligations and decision-making powers at the IMF and the World Bank need close alignment.
• Executive management should execute climate policies, but shareholders must have decision-making powers to oversee and control management’s action on climate.
• World Bank governance proposal:
  • For the World Bank’s climate agenda, an extended development and climate committee should be the true decision-making body, with powers similar to those of a general shareholder assembly.
  • This oversight body should be composed of member countries' finance ministers and should approve general guidelines on climate action, funding, and collaboration.
• IMF governance proposal:
  • Create a new governing body, the “IMF Council,” charged with oversight and direction of the climate action of the board of governors and the executive board.
  • The IMF Council should comprise one governor from each member country, typically the country’s finance minister.
  • The IMF Council should meet at least once annually to steer the climate action of the IMF.
• Existing advisory bodies referenced:
  • The World Bank Development Committee advises and makes recommendations to the governing boards of the World Bank Group and the IMF on critical development issues; it is usually composed of member countries’ finance or development ministers.
  • The International Monetary and Financial Committee is the IMF’s key advisory body on its core financial stability mandate and is composed of finance ministers and central bank governors.

Mandates

• The IMF and the World Bank should leverage their historical strengths and 80-year global experience.
• Historical institutional strengths:
  • IMF: top-down macroeconomic policy advice and macro-financial stability assessments.
  • World Bank: bottom-up project support, development policy advice, and infrastructure investment guidance.
  • Financial assistance: IMF—concessional lending and debt relief; World Bank—development grants and project funding.
• Recommended division of climate-related responsibilities:
  • IMF: focus on macroeconomic policy advice on integration of climate considerations into fiscal, monetary, and exchange rate policies, plus macro-financial stability assessments.
  • World Bank: offer policy advice on climate-related development policies and infrastructure investments.
  • IMF climate-related financial assistance: provide concessional lending to help countries address immediate balance of payments and fiscal challenges exacerbated by climate-related shocks.
  • World Bank climate-related financial assistance: mobilize climate financing through concessional and nonconcessional lending, grants, and innovative financial instruments to support climate-related projects and programs, particularly in low-income and vulnerable countries.

Recent IMF and World Bank Actions on Climate

• World Bank:
  • Increased financing for climate-related projects with focus on renewable energy, energy efficiency, sustainable transportation, climate-resilient infrastructure, and natural resource management.
  • Issues green bonds to finance climate-friendly projects and programs.
  • Provides technical assistance, policy advice, and policy-based lending to help countries design and implement carbon pricing mechanisms, such as carbon taxes and emissions trading systems.
• IMF:
  • Conducts assessments of climate-related risks to macroeconomic stability, financial systems, and economic growth, providing analysis and policy recommendations.
  • Offers policy advice on integrating climate considerations into fiscal, monetary, and structural reform agendas.
  • Includes climate-related risks in financial sector surveillance and supports development of green finance markets and instruments, including green bonds, climate insurance, and carbon pricing mechanisms.

Key Policy Recommendations (summary)

• Mobilize substantial new financial resources for climate action at the IMF and World Bank rather than repurposing existing SDRs or central bank reserves.
• Fund the RSF through new commitments from a coalition of countries aligned with quota allocations.
• Account for IMF climate-related activities as general government obligations.
• Establish clear governance structures:
  • An extended development and climate committee at the World Bank with decision-making authority composed of finance ministers.
  • An “IMF Council” composed of one governor per member country to meet at least once annually to oversee IMF climate action.
• Preserve the IMF’s and World Bank’s core mandates while aligning their comparative advantages to climate-related policy advice and financing.

Axel A. Weber, F&D Magazine, June 2024. Opinions expressed are those of the author and do not necessarily reflect IMF policy.